Axon Enterprise Inc (NASDAQ:AAXN) may play one of the most influential roles in changing how law enforcement is done this century. It's become the go-to provider of electroshock weapons (its Taser brand) and body cameras, even adding capabilities like artificial intelligence that's intended to make video easier to search and use in the courtroom. 

But Axon's stock has stagnated recently, bouncing between the high teens and mid-20s since the beginning of 2015. For investors looking at this as a long-term play, this may be a stock that's just starting to show its potential. 

Police officer wearing an Axon body camera while talking to a civilian.

Image source: Axon.

Axon's business

Axon's biggest business today is weapons, which accounted for $202.6 million in revenue and $71.2 million in income from operations during 2016. For investors, I think the way to look at this business is like a foundation the company can build on. It's not going to grow or shrink a lot, but it will be a steady business while the body camera business expands.

Most of Axon's growth comes from body cameras, where 2016 revenue jumped to $65.6 million from $35.5 million a year earlier. Most of the revenue is currently made up of actual camera sales, but the real money is made in providing services like Evidence.com subscriptions. And this is where the company is adding resources in the form of artificial intelligence and platforms that everyone from officers to prosecutors can use to investigate cases. The intention in the long term is to reduce paperwork for law enforcement officers while increasing safety and accuracy in their jobs. And it's a big challenge to tackle.

Where all the money is made

I mentioned the growth in Axon body cameras and related services as the place where Axon is getting its growth -- but within that, it's the service segment that has the biggest potential for profit. 

In 2016, Axon service revenue was $29.7 million and generated a gross margin of 79.2%. When customers get on a service agreement, the margin goes way up, and it's recurring revenue rather than a one-time sale for Axon. And that's why you see recent business model changes. 

How to lock in long-term profits

When Axon introduced a free trial for Axon body cameras and Evidence.com subscriptions, it seemed like a crazy giveaway. But when you look at Axon's offering of unlimited data storage and an Axon camera upgrade every 2.5 years for $79 per user per month, the offer doesn't seem so crazy. That bundle may not come with a gross margin of 80%, but if the gross margin is 60% and customers are locked into long-term contracts, not to mention the lock-in of getting Axon ingrained in everyday use for officers and prosecutors, the business potential is incredible. 

The U.S. alone has 1.1 million sworn officers as of 2012 (the latest data from the Department of Justice), and while global data is scattered, a good approximation based on an aggregation of reports puts law enforcement officers worldwide at over 12 million.

In the U.S., the market opportunity for body cameras alone is $1.04 billion annually at the $79 per user per month price. Globally, that jumps to $11.4 billion. Let's assume U.S. adoption is 50% and global is 15%, or 1.25 million international users. If Axon generated $79 per month per user and had a 60% gross margin, its total revenue would be $1.71 billion and gross margin would be $1.02 billion. That's up from $268 million in sales and $170.5 million in gross margin during 2016. 

For a company with a current market cap of $1.15 billion, the upside for investors is tremendous. And Axon may just now be starting to scratch the surface of its potential as a business. It can lock law enforcement officers into long-term contracts and become extremely valuable to their day-to-day work, effectively locking in long-term revenue. And if Axon becomes the standard product that law enforcement uses, it could generate immense profits for years to come, making this a great growth stock for long-term investors. 

Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.